Do I Need to Report RSU Sold to Cover Taxes? A Complete Guide
Restricted Stock Units (RSUs) are a popular form of employee compensation, but their tax implications can be confusing—especially when shares are sold to cover taxes. A common question arises: Do I need to report RSU sold to cover taxes? The short answer is yes, but the details matter. This guide breaks down RSU taxation, reporting requirements, and how an RSU tax calculator can streamline the process.
1. Do I Need to Report RSU Sold to Cover Taxes?
When RSUs vest, they’re converted into company stock, and the fair market value (FMV) is taxed as ordinary income. Employers often sell a portion of your shares (“sell-to-cover”) to withhold taxes. You must report both the income from vested RSUs and the sale of shares, even if shares were sold automatically.
Key Reporting Requirements:
- Income at Vesting: Reported as wages on Form W-2 (Box 1)
- Sale of Shares: Reported on Form 8949 and Schedule D (capital gains/losses)
Failing to report these transactions can trigger IRS audits or penalties.
2. How RSU Taxation Works
RSUs involve two taxable events:
- Vesting (Ordinary Income): The FMV of shares at vesting is taxed as income
- Sale (Capital Gains): Profit from selling shares is taxed as short-term or long-term capital gains
Example Scenario:
100 RSUs vest when FMV = $50/share → $5,000 taxable income.
Employer sells 30 shares ($1,500) to cover 30% taxes.
You keep 70 shares. If sold later at $60/share:
Cost basis = $50/share.
Capital gain = ($60 - $50) x 70 = $700 (taxed based on holding period).
3. Using an RSU Tax Calculator
An RSU Tax Calculator helps estimate taxes owed at vesting and sale. These tools factor in:
- FMV at vesting
- Your income tax bracket
- State taxes
- Capital gains rates
Top Features of an RSU Tax calculator:
- Estimates withholding requirements
- Projects net proceeds after taxes
- Compares sell-to-cover vs. holding strategies
Popular options include PaycheckCity and EquityFTW.
4. Step-by-Step Guide to Reporting RSU Sales
Step 1: Report Vesting Income
- Include the FMV of vested RSUs as wages (Form 1040, Line 1)
- Verify amounts match your W-2 (Box 1)
Step 2: Report Share Sales
- Obtain Form 1099-B from your broker
- Transfer details to Form 8949 and Schedule D:
- Proceeds: Sale price of shares
- Cost Basis: FMV at vesting (adjusted for sell-to-cover)
Example:
If 30 shares were sold at $50 to cover taxes:
Proceeds = $1,500
Cost basis = $1,500 → No capital gain.
5. Common Mistakes to Avoid
Not Reporting the Sale
Even if shares were sold to pay taxes, the transaction must be reported.
Incorrect Cost Basis
Ensure your cost basis includes the FMV at vesting, not $0.
Missing Forms
Double-check 1099-B and W-2 for accuracy.
Conclusion
Reporting RSU sales is mandatory, whether shares are sold to cover taxes or held for investment. Use an RSU tax calculator to estimate liabilities and avoid errors. Always consult a tax professional for personalized advice.
Final Tip: Keep detailed records of vesting dates, FMV, and sale transactions to simplify filing.